Question

Cobe Company has already manufactured 28,000 units of Product A at a cost of $28 per unit. The 28,000 units can be sold at this stage for $700,000. Alternatively, the units can be further processed at a $420,000 total additional cost and be converted into 5,600 units of Product B and 11,200 units of Product C. Per unit selling price for Product B is $105 and for Product C is $70.

Required:
Prepare an analysis that shows whether the 28,000 units of Product A should be processed further or not.

Answer 1

Increase in net income from further processing $ 252,000.

Step-by-step explanation:

A company should process further a product if the additional revenue from the split-off point is greater than than the further processing cost.

Additional sales revenue = Sales revenue after further processing - sales revenue after split-off point

Note that the cost already incurred up to split-off point is a sunk cost which is irrelevant for the further processing decision.

$

Sales revenue after split off point

(11,200× 70) + (5,600× 105) = 1,372,000

Sales revenue at the split off point ( 700,000)

Additional sales revenue 672,000.

Less further processing cost (420,000)

Increase in net income from further processing 252,000.